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ECB's Praet: Eurozone Recovery Frail, No Risk Of Deflation

The economic recovery in Eurozone is fragile, but there is no risk of deflation, European Central Bank Executive Board Member Peter Praet said on Tuesday.

In a speech in Frankfurt, Praet said, "A recovery has started, but it is still in its infancy and fragile."

Global environment remains uncertain, structural reform and fiscal sustainability needs to be completed and financial sector regulation must be thoroughly revamped, the policymaker added.

On November 7, the ECB sprung a surprise by cutting the key interest rate by a quarter-point to a record low 0.25 percent, given the combination of low inflation, record unemployment and a stronger currency.

"We still have not reached the effective lower bound," Praet said. "And we still have not exhausted our standard policy lever..."

Praet said the ECB decided to cut interest rates this month because the bank expects inflation to remain weak, near levels close to the lower half of its price stability range, for an extended period of time. The ECB aims to keep inflation "below, but close to 2 percent".

"We believe our decision has rebalanced the risks to price stability, which had become tilted to the downside," the policymaker said. "We think deflation was not in sight before, and has become even more unlikely after our decision."

The latest rate cut has increased the buffer against unwelcome price surprises, he added.

The decline in inflation is broad-based and policy relevant, Praet noted. He pointed out that price pressures are likely to remain weak given high unemployment, low labor costs and subdued money and credit dynamics. "The confluence of evidence pointed to demand factors behind the fall in inflation," he said.

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